How to invest like ... John Maynard Keynes

The influential economist also happened to deliver annual returns of 15pc in a
timespan covering the Wall Street Crash and the Second World War. Our new
series examines the prowess of investors from history.

John Maynard Keynes was one of the 20th century's most influential thinkers. Within economics, his impact was seismic.

His legacy gained renewed relevance in the financial crisis, with the debate raging over whether governments should borrow and spend to stop the debt-laden economies of the developed world spiralling into depression – the "Keynesian" view.

His achievements are well documented, culminating in the Bretton Woods agreement in 1944, which formed the modern system of international finance. Keynes, as adviser to the British Treasury, was a principal negotiator.

But less known are the economist's astonishing stock-picking skills. His Cambridge college, King's, appointed him bursar in 1924. He channelled its resources into the Chest fund. Between 1924 and his death in 1946, the Chest fund grew from £30,000 to £380,000, a remarkable feat given the stock market turbulence of those decades and the economic impact of the Second World War.

The annual compounded return was 12pc and the fund's best year, according to maynardkeynes.org, was a 56pc return in 1936, compared with 10pc for the wider market.

The figures differ, depending on the source. An academic paper published last yearestimated that Keynes returned 15pc a year, compared with 8pc for the UK stock market, between 1924 and 1946. Either way, historians agree that Keynes was hugely successful.

But the path was far from smooth, with the fund tumbling in the 1929 Wall Street Crash. Keynes also saw his personal investments wiped out; notably, his 83pc allocation to shares at the end of August 1929 shows that he failed to see the looming crash.

But this painful experience provided valuable knowledge, shaping a new investing style for Keynes. He went from trying to make calls on the market to focusing on individual companies – a style adopted at the same time by legendary investor Benjamin Graham and later by his student Warren Buffett, who quoted him in newsletters to investors.

Keynes said at this road to Damascus moment that he wanted to calculate the "ultimate value", to be "satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these".

In a 1934 letter, he further acknowledged how he had changed: "As time goes on, I get more convinced that the right method in investment is to put fairly large sums into enterprises which one knows something about and in the management of which one thoroughly believes."

So what did he buy? Academics David Chambers and Elroy Dimson acknowledged Keynes's idiosyncratic style in a paper published last year. "Stories of share dealing from his bed and the need to fill up King's College chapel with grain as a result of his commodity dealing have become legend," they said.

In the Thirties, he dramatically increased his holdings of mining shares and recovery stocks. Union Corporation, the South African miner, was a core holding, as were Austin Motors and Hector Whaling. The authors also say he challenged convention merely in his devotion to equities. At the time, most institutions were wedded to bonds. At the end of the Thirties British life insurance companies had only a 10pc allocation to ordinary shares.

Keynes died in 1946 of a heart attack, by then a millionaire. As with all investment legends, his quotes should be savoured by today's investors. Here's one of the best: "Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market."